2G auction: Sauce for the goose, but not for the gander

While the government is scrambling for ways to increase its revenue from 2G spectrum after the failure of the auction, investors in telecom company shares are rejoicing.

Shares of Bharti Airtel, Idea Cellular and Videocon Industries, however, rose up to 3.5 percent after telecom spectrum auction failed to evoke the expected response from the players.

According to reports, the auctions would generate only about Rs 9,400 crore in revenues . Reuters

The auctions, which got over on just the second day of bidding, may generate less than a fourth of the revenue target initially set by the government, a Firstpost article had noted.

According to reports, the auctions would generate only about Rs 9,400 crore in revenues for the government as against its initial target of Rs 40,000 crore.

The Mumbai, Delhi, Karnataka, and Rajasthan circles attracted no bidders. These circles account for 51 percent of the reserve price, said brokerage Goldman Sachs. The only circle for which the bids had exceeded the reserve price was Bihar.

The GSM lobby group Cellular Operators Association of India (COAI) had given three reasons for the failure of the auction: artificially high reserve price of Rs 14,000 crore for 5 mhz of spectrum; participation in auctions by only those telcos which had lost licences and were compelled to win back spectrum to stay in business; and creation of artificial scarcity by the government since it did not put up all available spectrum for auctions.

The auction revenue is important for the government as it is now running against time to rein in fiscal deficit at the targeted 5.3 percent of GDP. A miss in this target, which has now become a clear and present danger, is sure to result in a sovereign rating downgrade by rating agencies.

Why is this pain resulting in a gain in telecom shares?

Because investors expect this will force the government to scale down the high reserve price.

CNBC TV18 yesterday reported that the department of telecom is expected to make a fresh reference to sector regulator Trai on the contentious spectrum pricing, which has been blamed for the flop show of the auction.

"We believe an unsuccessful 2G auction shows that there is limited demand for spectrum at high prices. We believe the government will likely reduce the reserve price in circles where there was not even a single bid," said the Goldman Sachs research report.

"Since the winning price of this auction will be linked to renewal spectrum price and for onetime charge, we now see downside risks to potential regulatory payments for incumbents like Bharti/Idea," it said.

It sees limited demand for the refarming of spectrum in the 900 MHz band.

The brokerage has a buy rating on Idea.

"There was probably a degree of collusion or prior agreement among the big players that they will not bid seriously. This needs to be investigated," a Firstpost article had earlier noted.